Tired of Feeling the Squeeze?

Join with us to build a multi-faceted coalition, representing labor, management, professional, and taxpayers’ interests. To help us move forward with this effort, please drop us a line of support at join@Cheiron.us.

It’s tough enough for plan sponsors to deal with eroding pension assets and a sluggish economy.   Adding insult to injury is an obsolete, punitive and internally contradictory regulatory overlay that makes it harder for sponsors to navigate the economic storm they face.   It is essential, therefore, for sponsors to raise their voices today to get some relief, or face near-certain drowning.

In particular, Federal minimum funding rules and accounting requirements are creating an artificial financial crisis that will make the funds’ true losses appear far worse than they are. The result could be a downward spiral for the entire U.S. economy.

In recent months, many major companies have disclosed that investment losses on their pension funds are having a major impact on their reported 2002 earnings, and this is based on 2001 investment results. The continuation of the bear market in 2002 means more scary news in the year ahead.

Ford, for example, recently reported it just had to contribute $500 million to its defined benefit pension plan to offset a shortfall, and would kick in another $500 million by June. Ford said its decision to cut its assumed rate of return on pensions in the U.S., Canada and Britain to 8.75% from 9.5% would trigger an estimated $270 million pretax cost this year. And lower-than-projected returns for GM’s fund, meanwhile, forced the auto giant to make a $2.2 billion contribution last year after having made no contributions in the previous two years. More recently US Airways is seeking relief from the federal agencies (PBGC) on minimum funding rules for its pension plan to help it emerge from bankruptcy. Without that relief the plan may have to terminate and thousands of workers would lose significant benefits.

While the dollars are large in those examples, the story’s the same throughout the pension landscape. Such disclosures serve to fuel a continued lack of confidence in the economy, depressing stock prices and creating more bad news in 2004 as well.

Collective bargaining disasters

And that’s not all: In the collective bargaining arena, both labor and management are facing financial disasters with the implications of the federal funding and various liability rules on their pension funds.   One fund we are working with illustrates the point: The plan is 100% funded for all benefits earned to date, and 88% funded for all benefits ever to be earned and paid in the future.   Yet this fund is facing a funding requirement that will force the employers to more than double the amount they contribute in the near future.

Public sector funds, while hardly immune from investment losses, are thankfully, in better shape in terms of disclosure requirements. (Lurking in the background, however, is the prospect of new GASB-mandated accounting requirements.) As a result, public sector pension funds can rely on the experience and judgment of their actuaries in riding out this economic storm.

Here’s a closer look at some of the anomalies and absurdities of Federal pension funding and accounting rules that are creating no-win situations for plan sponsors and, ultimately, participants, beginning with minimum funding rules.

Funding Rule Flaws

Accounting rule challenges

As if problems with funding rules weren’t bad enough, here’s a quick rundown on what plan sponsors are up against with accounting standards:

Rigid amortization schedules

And here’s a significant problem involving both federal pension funding and accounting rules:  Both consider that a dollar paid today has the same value as a dollar paid 15 years from now.

The best way to understand the concept is to think about a home mortgage.   When you buy your first house you’re probably stretching the budget and worrying about how you are going to make those high monthly payments.   But after a few years, the burden and anxiety is diminished, thanks the fact that you (typically) are earning more relative to the fixed monthly obligation.  Yet the IRS’ liability amortization schedules don’t allow sponsors to take advantage of the predictable easing of the funding burden.

Public sector funds, however, are permitted to amortize payments with obligations rising in the future to reflect the impact of inflation, rather than using a level funding schedule.   For example, you may contribute $100,000 this year but $150,000 in ten years’ time to reflect anticipated inflation of 4% per year.

This practical and more realistic approach recognizes that a dollar today is not the same as a dollar 10 years from now.    It also means that the “burden” of the amortization payment remains the same as a percentage of payroll, and so the contribution to the plan when expressed as a rate will stay more stable.

Practical solutions

Here’s a quick rundown on what can—and should—be changed.

Everyone benefits

These recommendations, if adopted, would provide benefits for everyone.  Here are our top ten:

What you can do

None of these changes will occur without the plan sponsor and provider communities getting involved. The usual strategies—contacting Congressmen and Senators and industry representatives—are always vitally important.

But in addition, we urge you to join with us to build a multi-faceted coalition representing labor, management, professional, and taxpayers’ interests. To help us move forward with this effort, please drop us a line of support at join@Cheiron.us